Page 4
— Land & Development Quarterly — July 2016
Market Update
A
s the residential build-
ing boom for single-family
homes is occurring for much
of the metro area, some of
the Interstate 25 northern
metro areas have not enjoyed the
positive momentum due to their
reliance on Colorado-Big Thompson
as a raw water source.
Many communities require devel-
opers and builders to contribute
C-BT to the municipality or water
provider, in addition to purchasing
a water tap, for water service. C-BT
is the most widely accepted raw
water share in the market and is
preferred by most communities in
the northern I-25 corridor. Due to
the increasingly high price of C-BT,
which trades between $25,000 to
$30,000 per share, residential devel-
opment in many of the C-BT-depen-
dent communities
is at alarmingly low
levels. Many of the
new homes built
in these areas over
the last four years
were on real estate-
owned lots that
already fulfilled the
raw water require-
ments and were
acquired by inves-
tors or builders at
deeply discounted
prices.
Now that the
area is enjoy-
ing a stabilized real estate market,
traditional underwriting must be
considered. The price point and
corresponding buyer demand of
the home must be high enough to
support a line item for raw water
costs. When a developer or builder
underwrites land costs, historically
high horizontal infrastructure and
hard costs, impact fees and margin
requirements, it is very challenging
to add another line item for a full
share of C-BT if the finished product
is below $475,000.
However, some communities have
intelligently considered these oner-
ous costs and are now taking a
responsible position to proactively
spur residential growth. Adding
rooftops to these communities will
help support the existing services
and attract additional retailers,
which in turn make a community
more enjoyable. One such example
is the city of Dacono. In December,
the city passed a resolution regard-
ing water rights dedication. Prior to
the resolution, the city required one
share of C-BT per lot/house regard-
less of the lot/home size. Therefore,
a large 6,500-square-foot house on
a 1-acre lot with a significantly high
amount of manicured grass would
be treated the same as a 3,000-
sf house on a 6,000-sf lot, which
includes a significantly smaller yard.
Under the new resolution, the C-BT
requirement would be in concert
with the lot’s size. This allows for
smaller “production” lots to dedicate
a more reasonable amount of water
to the city, therefore allowing the
financial metrics to work.
As the metro area continues to
attract new residences, it is possible
that the municipalities that do not
adopt a reasonable raw water policy
will be left behind as others thrive
as vibrant communities.
s
C
ertainly the Denver metro
commercial real estate
market is strong across the
board, but what we’re expe-
riencing in the southeast
market area is absolutely unprec-
edented.
It all starts with rooftops and
there’s no shortage of demand for
housing and new residential devel-
opment in the southeast area. Virtu-
ally every sector is strong with mul-
tifamily and higher-density attached
projects now rivaling traditional
single-family detached housing for
the first time.
With the rebound from the last
downturn, the southeast market is
squarely on the radar for intense
residential growth and expansion,
and all that comes along with it. But
why? The central business district
and north metro areas are enjoying
a strong resurgence, too, but each
market has its own appeal and the
southeast region is uniquely differ-
ent. There’s a different feel and a
distinct appeal to this area and it
seems like everybody wants to be
here. The quality of life and fresh-
ness of the area appeal to new
Colorado residents, first-time home-
buyers and move-ups. The compre-
hensive planning for abundant open
space, parks and trails in the com-
munities in the southeast market
has created an appeal that’s hard
to match anywhere else along the
Front Range. And those who already
are calling the southeast area home
don’t appear to be moving away.
There is a strong demand for senior
housing of all types emerging to
serve that residential segment as
well.
Excellent transportation plan-
ning and ongoing
improvements
provide great
access to down-
town Denver, but
the area is quickly
developing its own
economy almost
independent of the
Denver market.
Employment in
the southeast con-
tinues to rise with
new office build-
ings coming out
of the ground as employers seek to
locate closer to their workforce, with
commercial and retail development
keeping pace.
Impact on land and commercial real
estate.
The demand to live, work,
shop and play in the southeast mar-
ket is creating pressure for develop-
ment opportunities, and the area
is rising to the challenge. New resi-
dential development is occurring in
pockets previously overlooked and
on land that was once considered
too great of a challenge to develop.
Attached housing and rental prod-
uct are finding a home in a part of
the metro that wasn’t previously
considered for that market segment
as employers and retailers find
room in the area and stake their
ground.
Vacant land prices now reflect the
combined demand in all sectors.
Homebuilders are paying record-
high numbers for ground even while
lot finishing and development costs
are soaring. Employment centers
and retailers are paying whatever it
takes to be here, but they’re all mak-
ing it work and they’re all confident
in the future of this market.
We’ve felt the pressure on retail
space and office space for lease,
with vacancies moving steadily
down and rates heading propor-
tionately up. Supply and demand.
Dark retail spaces and large blocks
of office space for sublease have all
but disappeared, and new inventory
is coming to market at rates higher
than we’ve ever experienced. Com-
mercial landlords are in the best
position they’ve ever been in and
leasing incentives are tightening up
as competition for space is outpac-
ing supply. Terms for lease renewals
are getting negotiated in the land-
lords’ favor and tenants are making
the deals work for them (as they’re
also enjoying success in this mar-
ket) to keep their locations secure.
Build-to-suit development is see-
ing its share of demand as well.
National tenants want to take a
position in this area and those proj-
ects are getting done. Owners of pad
sites and lots for commercial devel-
opment have been moving over to
ground leases rather than sales to
stay in the game for the upside, and
those deals are starting to come
together where they once were not.
A good indication of strength
in a growing market is diversified
product demand. More than just
ground for residential construction,
office space and retail space are in
demand. Large-scale manufactur-
ing, distribution and research-and-
development users are seeking new
locations in the southeast as well.
Some are new to the market, tak-
ing advantage of the workforce,
and some have been squeezed out
of industrial/light-industrial metro
Denver areas by the swelling “grow-
ers’ industry.” Light-industrial and
flex space also is experiencing
record demand. Small- to midsize
businesses in the service and sup-
ply industries are seeking a home in
the southeast and inventory is at an
all-time low. New flex space build-
ings are getting leased up before
they’re completed as owners of new
and growing businesses living in the
southeast are setting up shop close
to home.
Income and investment proper-
ties have felt the strength of the
demand in this area as well. The
wave of income and investment
property buyers (typically 1031
driven) that pushed through the
market over the last couple of years
consumed a good deal of the avail-
able inventory at record numbers.
Now the remaining properties with
less attractive cap rates and in less
desirable condition are moving
too. Those buyers are betting on
the continued demand at all levels
(office, retail, medical, industrial and
light-industrial) and making strong
investments.
There are plenty of statistics to
support what’s going on in the
southeast market. But is it sustain-
able? We think so, and perhaps
more so than in any other region.
It’s the character and appeal of the
area that everybody wants to tie
into. Obviously, the residential mar-
ket is a primary driver. But unlike
the last peak in housing demand,
that segment is not being fueled in
this area by unrealistic residential
financing and the resulting end-
less fields of flavorless housing. It’s
being driven by homeowners’ desire
to live here (not to just buy a home
because they can) and an evolving
rental market.
s
Eric Roth
First vice
president, Land
Services|Capital
Markets, CBRE,
Greenwood Village
Mitch Trevey
Managing director,
Trevey Land and
Commercial, Parker
